We are pleased to announce the publication of a Model Bilateral Arbitration Treaty for comment by interested governmental, commercial and other parties. Comments can be sent to whbilateral_arbitration_treaty@wilmerhale.com or posted for public review by commenting below.
The Model Bilateral Arbitration Treaty (“BAT”) provides a default arbitration mechanism for the resolution of defined international commercial disputes. The mechanism would utilize the UNCITRAL Arbitration Rules, providing an expert, efficient and enforceable means of resolving commercial disputes when nationals from contracting states had not agreed upon an alternative means of dispute resolution. Awards made pursuant to the BAT would be subject to recognition in the contracting states pursuant to the terms of the New York Convention and, subject to additional arrangements, in all New York Convention contracting states.
Gary Born, Chair of the International Arbitration Group at Wilmer Cutler Pickering Hale and Dorr LLP commented: “The proposed Bilateral Arbitration Treaty is a novel and exciting new development in international dispute resolution. I am enthusiastic about the response it has received in capitals around the world, and in the business community. We welcome comments and proposals for amendments or additions to the draft as the concept of a Bilateral Arbitration Treaty moves off the drawing board and into practice.”
The draft Model BAT can be accessed by clicking here. A commentary on the Model BAT’s provisions can be accessed by clicking here. Further details about the Model BAT and its rationale can be found in an article which can be accessed here or in a speech at the University of Pennsylvania Law School by Professor Gary Born, which can be viewed here.
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Dear Gary,
Great piece of work!
Here’s my comments / suggestions:
Article 1
The definition of “Enterprise” should not be limited to legal or juridical entities but rather extend to “individuals” as such. True that the definition encompasses the notion that an enterprise may be owned by private persons but conceptually speaking – at least in the context of most civil law jurisdictions, including those of the Portuguese speaking countries – this notion would entail the “judicial capacity” of an enterprise “de per se” to have a standing to appear in arbitration. However, such understanding will necessary clash with the concepts of legal and judicial personality and capacity: save exceptional cases only legal or natural persons enjoy legal and judicial personality and capacity to litigate / arbitrate.
This obstacle will be more apparent when reading the
definition of “Enterprise of a Party”.
On the other hand, I do not entirely agree that a BAT should exclude “natural persons” – who may have an enterprise of their own without any juridical shell.
Article 2
Will the tier process be mandatory? It doesn’t seem so – see
Article 5(2) “a contrario” – but an express provision would be justifiable.
Article 2(c) and 6
Considering that the negotiation process of the BAT will necessarily be bilateral (at least for the time being) and most likely subject to assessments concerning the legal framework of each contracting State, shouldn’t we dispense with the recognition procedure?
I believe that this would be a fundamental pillar of the new BATs.
Article 3(2)
What about interim measures during the arbitration proceedings?
I still have some doubts as to whether or not to exclude them from the jurisdiction of local courts when exceptional / urgent circumstances justify doing so.
Article 4
What about providing for a “lex arbitri” in support of
arbitration?
Article 4(1)(a)
What about providing for a set of rules of one specific (or
any given) institutional center of one of the parties?
Article 7(2)(a)
I would suggest adding that the “subject matter is not capable of settlement by arbitration under the law of that Party or does not fall within the definition of “International Commercial Dispute” of this Treaty”.
Thanks
Duarte G. Henriques
As one might expect, this is far-ranging and adventurous, and gives us lots to think about.
What must be the principal caveat is this (tediously predictable as I know it is): Sophisticated players engaged in transnational contracting can be counted on from the very beginning to be aware of their possibilities, to rationally assess advantages and disadvantages, and to slip into arbitration in the natural and familiar way. In the case of less sophisticated players—in the
case of one-shot players—this is more likely to operate as a trap for the unwary, who may be surprised to learn that their alternatives have been foreclosed before a dispute has even arisen. Conversely, sophisticated players are also more likely to have the resources—economic, informational, and cognitive—to enable them to “contract around” the treaty’s default mechanism should they wish, making the treaty’s default rule a dubious or problematic benefit for the “SME.”)
Gary himself is characteristically careful enough not to say so, but proponents of similar ideas have not concealed the fact that in their eyes, an altered default rule would have the virtue of causing arbitration to “lose its contractual foundation” altogether—a
claim that I have said may “display considerable analytical confusion”; see Rau, Understanding (and Misunderstanding) “Primary Jurisdiction,” 21 Amer. Rev. of Int’l Arb. 47, 161 n. 294 (2011). It does seem a particularly gutsy move here to “expect” that a treaty arbitration will benefit, in the courts of non-contracting states, from the New York Convention, on the basis that a valid agreement to arbitrate is thereby “deemed”to exist. Concededly, though, knowing acquiescence in a state’s default rule is often treated in other contexts as being somehow “consensual.”
And there’s certainly nothing wrong with pushing the envelope. But are we really experiencing a paucity of arbitration activity that justifies digging so deep into the barrel?
A very minor drafting point: Given the canonical distinction, in the US and elsewhere, between claims that “arise out of a contract” and other, say tort, claims, that don’t so “arise”—but that are “related” to the contract—a distinction that has become second nature to many—I wonder whether the definition of “international
commercial disputes” in art. 1 can really be squared with par. 14 of theCommentary: The definition in art. 1 indeed expands the notion of “contracts, transactions, or activities,” but does not expand the operative verb.
Professor Rau says that BAT would be “a trap for the unwary, who may be surprised to learn that their alternatives have been foreclosed before a dispute has even arisen”. Let’s think what are the alternatives of the unwary: they are few or often none. Without BAT, the unwary are often stuck with a court, whose language they may not speak, whom they may not trust and which will take forever to decide the case. On balance, once the dispute arises, I think the unwary will find BAT more helpful than not. Those who want to evade their obligations by dragging out the court proceedings may well not like BAT, but my question is: Should we worry about them?
I congratulate Gary for his initiative.
I fully agree with the earlier comments expressed by Dr. Sekolec, as more fully expressed in my 2012 article, Court Litigation over Arbitration Agreements: Is it Time for a New Default Rule? 23 Am. Rev. of Int’l Arb. 113. In that article, I proposed a “default” regime very similar to that suggested by Gary (providing for UNCITRAL Arbitration Rules by default and a resulting role for the PCA in a manner analogous to the application of the Panama Convention to a “bare bones” agreement to arbitrate, at 133-35), but suggested that such a default rule would be particularly beneficial to SMEs (at 131). The obvious disadvantages of litigation of an international commercial dispute would arguably have even greater negative impacts on an SME than on a large MNE, such that a fully informed and objectively rational SME would arguably be even more likely to choose arbitration if it made an express contractual choice.
This idea of arbitration as a default rule has been “percolating” for a while now (see Jack Graves, ICA and the Writing Requirement: Following Modern Trends towards Liberalization or Are We Stuck in 1958? 3 BELGRADE L. REV. 36 (Int‟l ed. 2009); and Gilles Cuniberti, Beyond Contract – the Case for Default Arbitration in International Commercial Disputes, 32 FORDHAM INT’L L. J. 417 (2009); and, more recently, Margaret Moses, Arbitration by Default Rather than by Consent, 7 NYSBA N.Y. Disp. Res. Law. 30 (2014); and Margaret Moses, Challenges for the Future: The Diminishing Role of Consent in Arbitration, 11 Transnat’l Dispute Mgmt Issue 4 (2014). In fact, I first heard this “adventurous” proposition in a talk delivered by Dr. Eugen Salpius, a former President of the Chartered Institute of Arbitrators, when I invited him to speak at Stetson University School of Law in early 2005. It is great to see Gary add his considerable reputational weight to this discussion, as well as his thoughtful templates for BATS or MATS to be used in implementing such a default rule. Perhaps this will provide the necessary push to give the idea some serious traction.
What Professors Graves and Sekolec say is all quite sensible, but it is all post-hoc paternalism. (“You should be grateful to us for what we’re doing for you.”). The problem I pointed to, of surprise (as well as of unequal ability, cognitive and financial, to contract around the new “default rule”) remains. We’re all familiar with default rules (consider, e.g., the UCC or CISG “presumption of merchantable goods”) but they correspond to the probable expectation of the contracting parties as opposed to the contrary (“the buyer can sell any worthless shlock”)—which relieves the parties of the burden of specifying anything one way or the other. Default rules are just a means of interpreting silence. By contrast, if arbitration is familiar as the common method of dispute resolution, it has always been the result of a conscious choice to opt in favor of it and away from the cultural expectation of litigation. Why depart from that model?
Professor Rau asks “why depart from [the traditional] model?” I think the answer goes to the nature of default rules. In my view, a majoritarian default rule should provide the outcome that the “fully informed and objectively rational” business person would choose, which may differ from the choice of a business person who is ignorant at the time regarding available contracting options. Perhaps this does indeed involve a dose of paternalism. Default rules often do.
Consider a transaction between a small California buyer and a small Korean seller, without any dispute resolution provisions (the buyer had never heard of the New York Convention and had never considered that an arbitration award might actually be easier to enforce than a court judgment, and business people drafting their own agreements will often ignore dispute resolution). The buyer now has a claim for breach of contract against the seller, and the seller disputes the claim. The buyer will typically have two options: (1) sue in a California court using a local lawyer and get a judgment (likely a default), which is of virtually no value, unless the seller has US assets (rarely, if the counter-party is also a small business), or (2) sue in Korea, which requires buyer to hire Korean counsel (and likely use local counsel to try to supervise Korean counsel) and subject itself to original court proceedings in a legal system it does not understand or necessarily trust.
In contrast, consider the same buyer if arbitration was the default (pursuant to a BAT or MAT). The buyer would initiate ad hoc arbitration proceedings through local counsel, who could invoke the assistance of the PCA, if needed in constituting a tribunal, and obtain an award through arbitration (whether contested or by default, assuming buyer deserves one), which could be enforced in Korea. Admittedly, enforcement in Korea would require Korean counsel, but at that point, buyer would already have an award enforceable under the New York Convention.
I believe that, if you were to explain the above legal options, objectively and without favor, along with their associated risks, benefits, and costs, a solid majority of business people would chose the arbitration regime at the time of contracting. At that time, each party wants to know the promises of its counterparty will be efficiently and effectively enforced. However, when the dispute arises, one of those parties will almost always have a different opinion. I have no problem “imposing” arbitration on that party.
One more comment, and then I think I should return the blog to the community.
Ex ante, Professor Graves’ small California buyer may think he is as likely to be a future defendant as a future plaintiff—in which case he’d rather be in California. Or he may be dealing with a Korean seller with an office and assets in California—in which case he’d rather be in California. Or he may be dealing with a chain of suppliers, some US and some Korean—in which case he’d rather see everyone joined in one litigation in California. All rational choices, and the BAT isn’t doing him a favor in any of these cases.
Now you can separate out these goats, from your sheep, on the basis (a) of your own intuition, or a priori assertion, with respect to where the cost/benefit analysis is likely to end up. Or (b) you can let the actual contracting process sort it out. The only thing of which we can be absolutely certain is that our buyer (at least if he’s ever turned on a TV) fully expected that any disputes would be settled in a court of competent jurisdiction: Majoritarian defaults are a means of giving effect to these unexpressed expectations.
And I fully agree with Professor Rau that we should bring our discussion here to a close (and will resist the temptation of additional substantive replies for now). Perhaps we will have further opportunities to engage on the suitability of applying a BAT or MAT to small business if this idea of arbitration as a default rule gains further traction.